Home

April 8, 2015

Never mind 'Make in India' - here's what India's defence sector needs

Speaking at
an interactive session organised by the Confederation of Indian
Industry at Bengaluru in February this year, Defence Minister Manohar
Parrikar said we need ‘implementation and action’ and not
‘little-little’ changes in policy.

Implementation

While
that is true in a general way, one policy that requires not just
implementation and action but also more than ‘little-little’ changes is
the ‘Make’ procedure, a curious mix of policy and procedure.

Introduced
in 2006, it was intended to provide an opportunity to Indian industry
to undertake research, design and development of high-technology complex
systems, with government funding up to 80 per cent of the cost of
prototype development and assured purchase order for the predefined
quantity of the equipment so developed.

Sadly, not a single project has taken off under this category so far.

The question, then, is what past experience shows, and what needs to be done now.

In
2011, the MoD came out with a Defence Production Policy whose objective
was to achieve ‘substantive self-reliance’ through indigenization.

The
next year, the MoD promulgated a new look ‘offset’ policy which
requires foreign companies to plough back at least 30 per cent of the
contract value into the Indian defence sector, if the contract is for Rs
300 crore or more, through one of several permissible modes, including
transfer of technology or equipment to the Indian Offset Partners.

The
hierarchical ordering of the modes of procurement that requires
preference to be given to procurement from indigenous sources either by
way of outright purchase or by involving the Indian industry in the
manufacturing of defence equipment, was the highlight of the revised
Defence Procurement Procedure (DPP) of 2013.

The
latest in a series of steps taken by the MoD was raising of the FDI cap
in defence production last year from 26 to 49 per cent, with removal of
the condition that 51 per cent of the stake in the investee company
should be in the hands of a single Indian individual or company.

These measures were expected to revolutionise indigenous defence production, but that has not happened.

Ironically, this is the period when India was on its way to becoming the largest importer of arms.

Initiative

The
call given by the PM to ‘come, make in India’ and the subsequent
‘Make-in-India’ blitzkrieg by the governmental agencies have raised new
questions about defence production without addressing the old ones.

The question now being asked is: how does the current ‘Make-in-India’ initiative fit with the make procedure?

While
‘Make-in-India’ is apparently all about inviting the foreign companies
to use India’s soil for manufacturing defence equipment, the make
procedure is designed to promote the Indian industry to take the lead in
the matter of defence procurement and production.

The information put out on the ‘Make-in-India’ website mostly pre-dates the PM’s call and fails to address this question.

There
is no doubt that both foreign companies and Indian industry will have
to play a role in India’s quest to become a manufacturing hub.

The
defence public sector in India, the ordnance factories and the defence
research and development organization cannot be written off as the MoD’s
non-performing assets. It would be naive to argue – as some people do -
that their role needs to be drastically curtailed to give the private
sector an opportunity to speed up indigenization.

Clarity

Clearly,
what is needed is a policy that brings clarity regarding the role each
of these players is expected to take in strengthening the defence
manufacturing sector in India and how these roles will be synergised. It
should also address the question of transfer of technology,
co-production and co-development.

Such
a policy will work only if it is backed by an procedural framework. The
DPP 2013 will need to be reconceptualised to bring it in sync with the
new policy.

In particular, the make procedure will need to be re-oriented to accommodate the spirit of ‘Make-in-India’.

A
foreign company wanting to enter the Indian defence production sector
must know how to go about it; DPP 2013 does not answer this question.

But
with its 142nd ranking in the global index of ease-of-doing business
India cannot expect to attract foreign companies or even fire up Indian
industry, which has its own list of woes relating to taxation, deemed
export status for the defence industry, industrial licensing, and the
like.

All
these issues need to be addressed. Disjointed measures, such as raising
of the FDI limit to 49 per cent, have very limited impact when taken in
isolation.

Lastly,
greater professionalism is required in handling several activities,
such as formulation of the qualitative requirements (specifications)
which have derailed several procurement programmes in the past. This
entails difficult structural reforms.

The
MoD could signal its intention of bringing about a change by setting up
a forum where the representatives of the industry – both Indian and
foreign – could regularly meet ministry officials for discussions.

Pragmatic and implementable solutions will arise only from such interactions.